ECONOMICS OF HEALTH POLICY

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1 ECONOMICS OF HEALTH POLICY Course proposal and syllabus May 2011 Samuel S. Richardson Health Policy PhD Candidate, Harvard University Prepared for Designing the Course of the Future, a Derek Bok Center for Teaching and Learning seminar, with financial support from The Teagle Foundation

2 COURSE MOTIVATION AND DESCRIPTION Health care spending has been rising inexorably for decades, now accounting for over one- sixth of the United States economy 1 and about one- quarter of the federal budget. 2 The ability to think critically about health policy issues is almost a necessity for today s college students, whether they plan to work in the health care sector, contribute to public policy, or simply be well- informed citizens and taxpayers. Meanwhile, economics has been emerging as the dominant social science for analyzing health policy questions. This course will teach students (potentially with no background in economics) how to apply economic thinking to a range of important health policy questions. In this course, I want to avoid the danger of students being overwhelmed by sheer quantity of reading. Mastery comes from deep engagement with course material, not from completing a long reading list. I have selected one focused reading per week, and we will use the shared review features of Adobe Acrobat to dig deeply into that reading. 3 Class time will be spent reinforcing the broad economic concepts from the readings, and discussing how to apply those concepts beyond the context of one particular reading. 1 CMS, National Health Expenditures 2009 Highlights: 2 OMB, Fiscal Year 2012 Historical Tables, Budget of the U.S. Government, Table 16.1: 3 See Reading in the Course of the Future: Using Adobe Acrobat Shared Review to Engage your Students through the Text, by Samuel S. Richardson. May

2 The ability to think critically about health policy issues is almost a necessity for today s college students, whether they plan to work in the health care sector, contribute to public policy, or

3 LEARNING GOALS CONTENT GOALS Students will gain the ability to: Explain the main assumptions neoclassical economists make about human nature, and discuss situations in which these assumptions are unlikely to hold. Interpret demand and supply curves, and explain why (and under what assumptions) their intersection identifies the economically efficient quantity. Discuss ways in which health care markets violate the assumptions underlying the efficiency of markets. Explain moral hazard and adverse selection, and identify situations in which these phenomena are likely to cause problems with health care markets. Understand characteristics of health insurance policies, and explain the reasons why health insurance plans have some of these characteristics. Apply cost- effectiveness analysis to resource allocation decisions. GOALS FOR SKILLS, VALUES, AND ATTITUDES Students will: Gain an appreciation of the (dismal) concept of scarcity. Develop an ability to explicitly consider the incentives (both financial and non- financial) that influence everyday decision- making. Develop an ability to think critically about unintended consequences of government policies. Improve their ability to argue persuasively for a policy position. Develop an ability to analyze health policy questions from an economic perspective. Understand the difference between correlation and causation, and be able to consider multiple explanations for observed correlations. 3

Discuss ways in which health care markets violate the assumptions underlying the efficiency of markets.

4 SCHEDULE WEEK 1. THE BIG PICTURE Macro- determinants of health Cross- country comparisons Health care cost growth An introduction to thinking about data 1) Reading: Atul Gawande. Testing, Testing: The health- care bill has no master plan for curbing costs. Is that a bad thing? The New Yorker. December 14, ) Use Gapminder ( to prepare a brief presentation on some interesting aspect of the life- expectancy vs. GDP per capita graph over time. (Due during week 3) WEEK 2. ECONOMICS I: DEMAND Where do demand curves come from? What do they represent? In what ways are demand curves for health care problematic? 1) Reading: Meredith Rosenthal. The Economics of Demand. Unpublished. WEEK 3. ECONOMICS II: SUPPLY AND MARKET EQUILIBRIUM Where do supply curves come from? What do they represent? Supply curves in the presence of market power Market equilibrium: when is it efficient? 1) Reading: Meredith Rosenthal. The Economics of Supply. Unpublished. 2) Brief written assignment: Choose any market and write two pages about ways in which the market equilibrium is or is not efficient. Use Google Docs to workshop with a partner; you will be graded both on your paper, and on the comments/suggestions you give to your partner. (Due during week 5) 4

org) to prepare a brief presentation on some interesting aspect of the life- expectancy vs. GDP per capita graph over time. (Due during week 3) WEEK 2.

5 WEEK 4. RISK AVERSION AND INSURANCE What is the theoretical reason for insurance? What are the main characteristics of a health insurance policy? 1) Reading: Michael Chernew. Cost Sharing in Health Care Markets. Testimony before the Subcommittee on Health, Committee on Ways and Means. May 4, ) Web activity: Go to and simulate buying an insurance policy for yourself. What differences do you notice if you use your home zip code instead of your college zip code? What influenced your decision- making the most? What should influence you, but maybe didn t? Write a one- page reflection and be prepared to discuss in class. WEEK 5. MORAL HAZARD What is moral hazard, and why does it lead to inefficiency in health care markets? What aspects of insurance policies counteract moral hazard, and what are the drawbacks of using these tools to reduce moral hazard? 1) Reading: Willard Manning et al. Health Insurance and the Demand for Medical Care: Evidence from a Randomized Experiment. AER (3): WEEK 6. ADVERSE SELECTION What is adverse selection, and why does it lead to inefficiency in health insurance markets? How can insurance markets be designed to reduce adverse selection problems? 1) Reading: David Cutler and Sarah Reber. Paying for Health Insurance: The Trade- Off between Competition and Adverse Selection. QJE. May 1998: WEEK 7. QUALITY OF CARE What do we know about the quality of medical care in the US? What economic incentives lead to skimping on quality? 5

com and simulate buying an insurance policy for yourself. What differences do you notice if you use your home zip code instead of your college zip code? What influenced your decision- making the most?

6 1) Take- home midterm exam covering weeks 1-6. Students will be asked to apply health economics concepts to answering questions about a policy proposal we have not studied in class. 2) Reading: Elizabeth McGlynn et al. The Quality of Health Care Delivered to Adults in the United States. NEJM (26): WEEK 8. GEOGRAPHIC VARIATIONS How large are the geographic variations in cost and quality of care? What are the possible economic explanations for geographic variations? 1) Find an opinion piece in a major newspaper or magazine regarding some aspect of health policy. Write a 3- page response in which you address how well the piece reflects the economic realities of health care. Use Google Docs to workshop with a partner; you will be graded both on your paper, and on the comments/suggestions you give to your partner. (Due during week 10) 2) Reading: Atul Gawande. The Cost Conundrum: What a Texas town can teach us about health care. The New Yorker. June 1, WEEK 9. REPORT CARDS AND PAY- FOR- PERFORMANCE What are the theoretical justifications for quality report cards and pay- for- performance (how do they affect demand and supply curves)? Do these methods increase the quality of care? What are the possible drawbacks (multitasking, other unintended consequences)? 1) Reading: Samuel Richardson. Pay- for- Performance in the National Health Service: Quality, Multitasking, and Unintended Consequences. Dissertation papers 2 & 3. WEEK 10. COST- EFFECTIVENESS AND COMPARATIVE EFFECTIVENESS How do we calculate cost- effectiveness ratios? How should we think about the economic value of human life? Why (and how) should health care be rationed? 6

GEOGRAPHIC VARIATIONS How large are the geographic variations in cost and quality of care? What are the possible economic explanations for geographic variations?

7 1) Reading: Imatinib for chronic myelogenous leukemia: a NICE mess. Comment and Letters to the Editor. Lancet WEEK 11. PHARMACEUTICALS What do we mean by efficiency when it comes to pharmaceutical pricing and innovation? Why are there patent protections for drugs? 1) Reading: Nexium case study. 2) Send a written set of responses to the case study questions before class (about 2 pages). WEEK 12. HEALTH CARE REFORM AND COST GROWTH REVISITED What are the current health care reform proposals and how well do they address the cost growth problem? 1) Reading: Summary of current health reform proposals (created by me) 2) Online debate: Students will be split into small groups. Each group will engage in a discussion- forum- based debate about whether or not a particular reform proposal should be passed. 7

2) Send a written set of responses to the case study questions before class (about 2 pages). WEEK 12.

Notes - Gruber, Public Finance Chapter 20.3 A calculation that finds the optimal income tax in a simple model: Gruber and Saez (2002).

Notes - Gruber, Public Finance Chapter 20.3 A calculation that finds the optimal income tax in a simple model: Gruber and Saez (2002). Description of the model. This is a special case of a Mirrlees model.